Share this:

Friedrich August von Hayek - Prize Lecture

Lecture to the memory of Alfred Nobel,
December 11, 1974

The Pretence of Knowledge

The particular occasion of this lecture,
combined with the chief practical problem which economists have
to face today, have made the choice of its topic almost
inevitable. On the one hand the still recent establishment of the
Nobel Memorial Prize in Economic Science marks a significant step
in the process by which, in the opinion of the general public,
economics has been conceded some of the dignity and prestige of
the physical sciences. On the other hand, the economists are at
this moment called upon to say how to extricate the free world
from the serious threat of accelerating inflation which, it must
be admitted, has been brought about by policies which the
majority of economists recommended and even urged governments to
pursue. We have indeed at the moment little cause for pride: as a
profession we have made a mess of things.

It seems to me that this failure of the
economists to guide policy more successfully is closely connected
with their propensity to imitate as closely as possible the
procedures of the brilliantly successful physical sciences - an
attempt which in our field may lead to outright error. It is an
approach which has come to be described as the "scientistic"
attitude - an attitude which, as I defined it some thirty years
ago, "is decidedly unscientific in the true sense of the word,
since it involves a mechanical and uncritical application of
habits of thought to fields different from those in which they
have been formed."1 I want today
to begin by explaining how some of the gravest errors of recent
economic policy are a direct consequence of this scientistic
error.

The theory which has been guiding monetary
and financial policy during the last thirty years, and which I
contend is largely the product of such a mistaken conception of
the proper scientific procedure, consists in the assertion that
there exists a simple positive correlation between total
employment and the size of the aggregate demand for goods and
services; it leads to the belief that we can permanently assure
full employment by maintaining total money expenditure at an
appropriate level. Among the various theories advanced to account
for extensive unemployment, this is probably the only one in
support of which strong quantitative evidence can be adduced. I
nevertheless regard it as fundamentally false, and to act upon
it, as we now experience, as very harmful.

This brings me to the crucial issue. Unlike
the position that exists in the physical sciences, in economics
and other disciplines that deal with essentially complex
phenomena, the aspects of the events to be accounted for about
which we can get quantitative data are necessarily limited and
may not include the important ones. While in the physical
sciences it is generally assumed, probably with good reason, that
any important factor which determines the observed events will
itself be directly observable and measurable, in the study of
such complex phenomena as the market, which depend on the actions
of many individuals, all the circumstances which will determine
the outcome of a process, for reasons which I shall explain
later, will hardly ever be fully known or measurable. And while
in the physical sciences the investigator will be able to measure
what, on the basis of a prima facie theory, he thinks
important, in the social sciences often that is treated as
important which happens to be accessible to measurement. This is
sometimes carried to the point where it is demanded that our
theories must be formulated in such terms that they refer only to
measurable magnitudes.

It can hardly be denied that such a demand
quite arbitrarily limits the facts which are to be admitted as
possible causes of the events which occur in the real world. This
view, which is often quite naively accepted as required by
scientific procedure, has some rather paradoxical consequences.
We know: of course, with regard to the market and similar social
structures, a great many facts which we cannot measure and on
which indeed we have only some very imprecise and general
information. And because the effects of these facts in any
particular instance cannot be confirmed by quantitative evidence,
they are simply disregarded by those sworn to admit only what
they regard as scientific evidence: they thereupon happily
proceed on the fiction that the factors which they can measure
are the only ones that are relevant.

The correlation between aggregate demand
and total employment, for instance, may only be approximate, but
as it is the only one on which we have quantitative data,
it is accepted as the only causal connection that counts. On this
standard there may thus well exist better "scientific" evidence
for a false theory, which will be accepted because it is more
"scientific", than for a valid explanation, which is rejected
because there is no sufficient quantitative evidence for it.

Let me illustrate this by a brief sketch of
what I regard as the chief actual cause of extensive unemployment
- an account which will also explain why such unemployment cannot
be lastingly cured by the inflationary policies recommended by
the now fashionable theory. This correct explanation appears to
me to be the existence of discrepancies between the distribution
of demand among the different goods and services and the
allocation of labour and other resources among the production of
those outputs. We possess a fairly good "qualitative" knowledge
of the forces by which a correspondence between demand and supply
in the different sectors of the economic system is brought about,
of the conditions under which it will be achieved, and of the
factors likely to prevent such an adjustment. The separate steps
in the account of this process rely on facts of everyday
experience, and few who take the trouble to follow the argument
will question the validity of the factual assumptions, or the
logical correctness of the conclusions drawn from them. We have
indeed good reason to believe that unemployment indicates that
the structure of relative prices and wages has been distorted
(usually by monopolistic or governmental price fixing), and that
to restore equality between the demand and the supply of labour
in all sectors changes of relative prices and some transfers of
labour will be necessary.

But when we are asked for quantitative
evidence for the particular structure of prices and wages that
would be required in order to assure a smooth continuous sale of
the products and services offered, we must admit that we have no
such information. We know, in other words, the general conditions
in which what we call, somewhat misleadingly, an equilibrium will
establish itself: but we never know what the particular prices or
wages are which would exist if the market were to bring about
such an equilibrium. We can merely say what the conditions are in
which we can expect the market to establish prices and wages at
which demand will equal supply. But we can never produce
statistical information which would show how much the prevailing
prices and wages deviate from those which would secure a
continuous sale of the current supply of labour. Though this
account of the causes of unemployment is an empirical theory, in
the sense that it might be proved false, e.g. if, with a constant
money supply, a general increase of wages did not lead to
unemployment, it is certainly not the kind of theory which we
could use to obtain specific numerical predictions concerning the
rates of wages, or the distribution of labour, to be
expected.

Why should we, however, in economics, have
to plead ignorance of the sort of facts on which, in the case of
a physical theory, a scientist would certainly be expected to
give precise information? It is probably not surprising that
those impressed by the example of the physical sciences should
find this position very unsatisfactory and should insist on the
standards of proof which they find there. The reason for this
state of affairs is the fact, to which I have already briefly
referred, that the social sciences, like much of biology but
unlike most fields of the physical sciences, have to deal with
structures of essential complexity, i.e. with structures
whose characteristic properties can be exhibited only by models
made up of relatively large numbers of variables. Competition,
for instance, is a process which will produce certain results
only if it proceeds among a fairly large number of acting
persons.

In some fields, particularly where problems
of a similar kind arise in the physical sciences, the
difficulties can be overcome by using, instead of specific
information about the individual elements, data about the
relative frequency, or the probability, of the occurrence of the
various distinctive properties of the elements. But this is true
only where we have to deal with what has been called by Dr.
Warren Weaver (formerly of the Rockefeller Foundation), with a
distinction which ought to be much more widely understood,
"phenomena of unorganized complexity," in contrast to those
"phenomena of organized complexity" with which we have to deal in
the social sciences.2 Organized
complexity here means that the character of the structures
showing it depends not only on the properties of the individual
elements of which they are composed, and the relative frequency
with which they occur, but also on the manner in which the
individual elements are connected with each other. In the
explanation of the working of such structures we can for this
reason not replace the information about the individual elements
by statistical information, but require full information about
each element if from our theory we are to derive specific
predictions about individual events. Without such specific
information about the individual elements we shall be confined to
what on another occasion I have called mere pattern predictions -
predictions of some of the general attributes of the structures
that will form themselves, but not containing specific statements
about the individual elements of which the structures will be
made up.3

This is particularly true of our theories
accounting for the determination of the systems of relative
prices and wages that will form themselves on a wellfunctioning
market. Into the determination of these prices and wages there
will enter the effects of particular information possessed by
every one of the participants in the market process - a sum of
facts which in their totality cannot be known to the scientific
observer, or to any other single brain. It is indeed the source
of the superiority of the market order, and the reason why, when
it is not suppressed by the powers of government, it regularly
displaces other types of order, that in the resulting allocation
of resources more of the knowledge of particular facts will be
utilized which exists only dispersed among uncounted persons,
than any one person can possess. But because we, the observing
scientists, can thus never know all the determinants of such an
order, and in consequence also cannot know at which particular
structure of prices and wages demand would everywhere equal
supply, we also cannot measure the deviations from that order;
nor can we statistically test our theory that it is the
deviations from that "equilibrium" system of prices and wages
which make it impossible to sell some of the products and
services at the prices at which they are offered.

Before I continue with my immediate
concern, the effects of all this on the employment policies
currently pursued, allow me to define more specifically the
inherent limitations of our numerical knowledge which are so
often overlooked. I want to do this to avoid giving the
impression that I generally reject the mathematical method in
economics. I regard it in fact as the great advantage of the
mathematical technique that it allows us to describe, by means of
algebraic equations, the general character of a pattern even
where we are ignorant of the numerical values which will
determine its particular manifestation. We could scarcely have
achieved that comprehensive picture of the mutual
interdependencies of the different events in a market without
this algebraic technique. It has led to the illusion, however,
that we can use this technique for the determination and
prediction of the numerical values of those magnitudes; and this
has led to a vain search for quantitative or numerical constants.
This happened in spite of the fact that the modern founders of
mathematical economics had no such illusions. It is true that
their systems of equations describing the pattern of a market
equilibrium are so framed that if we were able to fill in all the
blanks of the abstract formulae, i.e. if we knew all the
parameters of these equations, we could calculate the prices and
quantities of all commodities and services sold. But, as Vilfredo
Pareto, one of the founders of this theory, clearly stated, its
purpose cannot be "to arrive at a numerical calculation of
prices", because, as he said, it would be "absurd" to assume that
we could ascertain all the data.4
Indeed, the chief point was already seen by those remarkable
anticipators of modern economics, the Spanish schoolmen of the
sixteenth century, who emphasized that what they called
pretium mathematicum, the mathematical price, depended on
so many particular circumstances that it could never be known to
man but was known only to God.5 I
sometimes wish that our mathematical economists would take this
to heart. I must confess that I still doubt whether their search
for measurable magnitudes has made significant contributions to
our theoretical understanding of economic phenomena - as
distinct from their value as a description of particular
situations. Nor am I prepared to accept the excuse that this
branch of research is still very young: Sir William Petty, the
founder of econometrics, was after all a somewhat senior
colleague of Sir Isaac Newton in the Royal Society!

There may be few instances in which the
superstition that only measurable magnitudes can be important has
done positive harm in the economic field: but the present
inflation and employment problems are a very serious one. Its
effect has been that what is probably the true cause of extensive
unemployment has been disregarded by the scientistically minded
majority of economists, because its operation could not be
confirmed by directly observable relations between measurable
magnitudes, and that an almost exclusive concentration on
quantitatively measurable surface phenomena has produced a policy
which has made matters worse.

It has, of course, to be readily admitted
that the kind of theory which I regard as the true explanation of
unemployment is a theory of somewhat limited content because it
allows us to make only very general predictions of the
kind of events which we must expect in a given situation.
But the effects on policy of the more ambitious constructions
have not been very fortunate and I confess that I prefer true but
imperfect knowledge, even if it leaves much indetermined and
unpredictable, to a pretence of exact knowledge that is likely to
be false. The credit which the apparent conformity with
recognized scientific standards can gain for seemingly simple but
false theories may, as the present instance shows, have grave
consequences.

In fact, in the case discussed, the very
measures which the dominant "macro-economic" theory has
recommended as a remedy for unemployment, namely the increase of
aggregate demand, have become a cause of a very extensive
misallocation of resources which is likely to make later
large-scale unemployment inevitable. The continuous injection of
additional amounts of money at points of the economic system
where it creates a temporary demand which must cease when the
increase of the quantity of money stops or slows down, together
with the expectation of a continuing rise of prices, draws labour
and other resources into employments which can last only so long
as the increase of the quantity of money continues at the same
rate - or perhaps even only so long as it continues to accelerate
at a given rate. What this policy has produced is not so much a
level of employment that could not have been brought about in
other ways, as a distribution of employment which cannot be
indefinitely maintained and which after some time can be
maintained only by a rate of inflation which would rapidly lead
to a disorganisation of all economic activity. The fact is that
by a mistaken theoretical view we have been led into a precarious
position in which we cannot prevent substantial unemployment from
re-appearing; not because, as this view is sometimes
misrepresented, this unemployment is deliberately brought about
as a means to combat inflation, but because it is now bound to
occur as a deeply regrettable but inescapable consequence of the
mistaken policies of the past as soon as inflation ceases to
accelerate.

I must, however, now leave these problems
of immediate practical importance which I have introduced chiefly
as an illustration of the momentous consequences that may follow
from errors concerning abstract problems of the philosophy of
science. There is as much reason to be apprehensive about the
long run dangers created in a much wider field by the uncritical
acceptance of assertions which have the appearance of
being scientific as there is with regard to the problems I have
just discussed. What I mainly wanted to bring out by the topical
illustration is that certainly in my field, but I believe also
generally in the sciences of man, what looks superficially like
the most scientific procedure is often the most unscientific,
and, beyond this, that in these fields there are definite limits
to what we can expect science to achieve. This means that to
entrust to science - or to deliberate control according to
scientific principles - more than scientific method can achieve
may have deplorable effects. The progress of the natural sciences
in modern times has of course so much exceeded all expectations
that any suggestion that there may be some limits to it is bound
to arouse suspicion. Especially all those will resist such an
insight who have hoped that our increasing power of prediction
and control, generally regarded as the characteristic result of
scientific advance, applied to the processes of society, would
soon enable us to mould society entirely to our liking. It is
indeed true that, in contrast to the exhilaration which the
discoveries of the physical sciences tend to produce, the
insights which we gain from the study of society more often have
a dampening effect on our aspirations; and it is perhaps not
surprising that the more impetuous younger members of our
profession are not always prepared to accept this. Yet the
confidence in the unlimited power of science is only too often
based on a false belief that the scientific method consists in
the application of a ready-made technique, or in imitating the
form rather than the substance of scientific procedure, as if one
needed only to follow some cooking recipes to solve all social
problems. It sometimes almost seems as if the techniques of
science were more easily learnt than the thinking that shows us
what the problems are and how to approach them.

The conflict between what in its present
mood the public expects science to achieve in satisfaction of
popular hopes and what is really in its power is a serious matter
because, even if the true scientists should all recognize the
limitations of what they can do in the field of human affairs, so
long as the public expects more there will always be some who
will pretend, and perhaps honestly believe, that they can do more
to meet popular demands than is really in their power. It is
often difficult enough for the expert, and certainly in many
instances impossible for the layman, to distinguish between
legitimate and illegitimate claims advanced in the name of
science. The enormous publicity recently given by the media to a
report pronouncing in the name of science on The Limits to
Growth, and the silence of the same media about the
devastating criticism this report has received from the competent
experts6, must make one feel
somewhat apprehensive about the use to which the prestige of
science can be put. But it is by no means only in the field of
economics that far-reaching claims are made on behalf of a more
scientific direction of all human activities and the desirability
of replacing spontaneous processes by "conscious human control".
If I am not mistaken, psychology, psychiatry and some branches of
sociology, not to speak about the so-called philosophy of
history, are even more affected by what I have called the
scientistic prejudice, and by specious claims of what science can
achieve.7

If we are to safeguard the reputation of
science, and to prevent the arrogation of knowledge based on a
superficial similarity of procedure with that of the physical
sciences, much effort will have to be directed toward debunking
such arrogations, some of which have by now become the vested
interests of established university departments. We cannot be
grateful enough to such modern philosophers of science as Sir
Karl Popper for giving us a test by which we can distinguish
between what we may accept as scientific and what not - a test
which I am sure some doctrines now widely accepted as scientific
would not pass. There are some special problems, however, in
connection with those essentially complex phenomena of which
social structures are so important an instance, which make me
wish to restate in conclusion in more general terms the reasons
why in these fields not only are there only absolute obstacles to
the prediction of specific events, but why to act as if we
possessed scientific knowledge enabling us to transcend them may
itself become a serious obstacle to the advance of the human
intellect.

The chief point we must remember is that
the great and rapid advance of the physical sciences took place
in fields where it proved that explanation and prediction could
be based on laws which accounted for the observed phenomena as
functions of comparatively few variables - either particular
facts or relative frequencies of events. This may even be the
ultimate reason why we single out these realms as "physical" in
contrast to those more highly organized structures which I have
here called essentially complex phenomena. There is no reason why
the position must be the same in the latter as in the former
fields. The difficulties which we encounter in the latter are
not, as one might at first suspect, difficulties about
formulating theories for the explanation of the observed events -
although they cause also special difficulties about testing
proposed explanations and therefore about eliminating bad
theories. They are due to the chief problem which arises when we
apply our theories to any particular situation in the real world.
A theory of essentially complex phenomena must refer to a large
number of particular facts; and to derive a prediction from it,
or to test it, we have to ascertain all these particular facts.
Once we succeeded in this there should be no particular
difficulty about deriving testable predictions - with the help of
modern computers it should be easy enough to insert these data
into the appropriate blanks of the theoretical formulae and to
derive a prediction. The real difficulty, to the solution of
which science has little to contribute, and which is sometimes
indeed insoluble, consists in the ascertainment of the particular
facts.

A simple example will show the nature of
this difficulty. Consider some ball game played by a few people
of approximately equal skill. If we knew a few particular facts
in addition to our general knowledge of the ability of the
individual players, such as their state of attention, their
perceptions and the state of their hearts, lungs, muscles etc. at
each moment of the game, we could probably predict the outcome.
Indeed, if we were familiar both with the game and the teams we
should probably have a fairly shrewd idea on what the outcome
will depend. But we shall of course not be able to ascertain
those facts and in consequence the result of the game will be
outside the range of the scientifically predictable, however well
we may know what effects particular events would have on the
result of the game. This does not mean that we can make no
predictions at all about the course of such a game. If we know
the rules of the different games we shall, in watching one, very
soon know which game is being played and what kinds of actions we
can expect and what kind not. But our capacity to predict will be
confined to such general characteristics of the events to be
expected and not include the capacity of predicting particular
individual events.

This corresponds to what I have called
earlier the mere pattern predictions to which we are increasingly
confined as we penetrate from the realm in which relatively
simple laws prevail into the range of phenomena where organized
complexity rules. As we advance we find more and more frequently
that we can in fact ascertain only some but not all the
particular circumstances which determine the outcome of a given
process; and in consequence we are able to predict only some but
not all the properties of the result we have to expect. Often all
that we shall be able to predict will be some abstract
characteristic of the pattern that will appear - relations
between kinds of elements about which individually we know very
little. Yet, as I am anxious to repeat, we will still achieve
predictions which can be falsified and which therefore are of
empirical significance.

Of course, compared with the precise
predictions we have learnt to expect in the physical sciences,
this sort of mere pattern predictions is a second best with which
one does not like to have to be content. Yet the danger of which
I want to warn is precisely the belief that in order to have a
claim to be accepted as scientific it is necessary to achieve
more. This way lies charlatanism and worse. To act on the belief
that we possess the knowledge and the power which enable us to
shape the processes of society entirely to our liking, knowledge
which in fact we do not possess, is likely to make us do
much harm. In the physical sciences there may be little objection
to trying to do the impossible; one might even feel that one
ought not to discourage the over-confident because their
experiments may after all produce some new insights. But in the
social field the erroneous belief that the exercise of some power
would have beneficial consequences is likely to lead to a new
power to coerce other men being conferred on some authority. Even
if such power is not in itself bad, its exercise is likely to
impede the functioning of those spontaneous ordering forces by
which, without understanding them, man is in fact so largely
assisted in the pursuit of his aims. We are only beginning to
understand on how subtle a communication system the functioning
of an advanced industrial society is based - a communications
system which we call the market and which turns out to be a more
efficient mechanism for digesting dispersed information than any
that man has deliberately designed.

If man is not to do more harm than good in
his efforts to improve the social order, he will have to learn
that in this, as in all other fields where essential complexity
of an organized kind prevails, he cannot acquire the full
knowledge which would make mastery of the events possible. He
will therefore have to use what knowledge he can achieve, not to
shape the results as the craftsman shapes his handiwork, but
rather to cultivate a growth by providing the appropriate
environment, in the manner in which the gardener does this for
his plants. There is danger in the exuberant feeling of ever
growing power which the advance of the physical sciences has
engendered and which tempts man to try, "dizzy with success", to
use a characteristic phrase of early communism, to subject not
only our natural but also our human environment to the control of
a human will. The recognition of the insuperable limits to his
knowledge ought indeed to teach the student of society a lesson
of humility which should guard him against becoming an accomplice
in men's fatal striving to control society - a striving which
makes him not only a tyrant over his fellows, but which may well
make him the destroyer of a civilization which no brain has
designed but which has grown from the free efforts of millions of
individuals.

1. "Scientism
and the Study of Society", Economica, vol. IX, no. 35,
August 1942, reprinted in The Counter-Revolution of
Science, Glencoe, Ill., 1952, p. 15 of this reprint.

3. See my essay
"The Theory of Complex Phenomena" in The Critical Approach to
Science and Philosophy. Essays in Honor of K.R. Popper, ed.
M. Bunge, New York 1964, and reprinted (with additions) in my
Studies in Philosophy, Politics and Economics, London and
Chicago 1967.

6. See The
Limits to Growth: A Report of the Club of Rome's Project on the
Predicament of Mankind, New York 1972; for a systematic
examination of this by a competent economist cf. Wilfred
Beckerman, In Defence of Economic Growth, London 1974,
and, for a list of earlier criticisms by experts, Gottfried
Haberler, Economic Growth and Stability, Los Angeles 1974,
who rightly calls their effect "devastating".

7. I have given
some illustrations of these tendencies in other fields in my
inaugural lecture as Visiting Professor at the University of
Salzburg, Die Irrtümer des Konstruktivismus und die
Grundlagen legitimer Kritik gesellschaftlicher Gebilde,
Munich 1970, now reissued for the Walter Eucken Institute, at
Freiburg i.Brg. by J.C.B. Mohr, Tübingen 1975.